Majority Joint Stock Banks And State-owned Banks Have Lowered Deposit Rate By 10bp; Expect More Rate Cuts To Bolster Economy
The 1Q22 China Monetary Policy Report indicated that most of the banks in China have
lowered their interest rates. The new weighted average deposit rate of China financial
institutions in end-Apr 22 was 2.37%, decreasing 10bp from the previous week. Weak
trade figures raise the risk of China’s GDP shrinking. We expect more rate cuts to be
taken to bolster the economy. Top picks are CMB (3968 HK) and CCB (939 HK) with a
target price of HK$82.9 and HK$8.05 respectively. Maintain MARKET WEIGHT.
WHAT’S NEW
• Market interest rate self-regulatory mechanism committee established a marketbased adjustment mechanism for deposit interest rates. Intense competition for
deposits has caused most time deposits rate and large-denomination certificates rate to
rise close to the self-regulatory ceiling. This has hampered the effective monetary policy
transmission and in Apr 22, the PBOC advised the interest rate self-regulatory
mechanism committee to construct a market-oriented deposit rate adjustment
mechanism. Members of the self-discipline mechanism will adjust the level of the deposit
interest rate based on the 10-year government bond yield and the one-year loan prime
rate (LPR).
• Under this framework, banks can still independently decide on the actual adjustment
range of their deposit interest rates based on their own conditions and changes in market
interest rates. The PBOC will incentivise financial institutions that make effective and
timely market-based adjustments to deposit interest rates eg further decreasing the
deposit cost or adjusting the medium-term lending facility (MLF) rate. After the
implementation of the new mechanism, banks’ deposit interest rates will be more marketdriven and help in stabilising debt costs and support further falls in loan interest rates, in
line with declining market interest rates.
• Most banks’ deposit interest rates were reduced by 10bp in end-Apr 22. Following
the above changes, state-owned banks such as the Postal Savings Banks of China,
China Construction Bank and the majority of joint-stock banks reduced the interest rates
on their time deposits and large-denomination certificates deposit with maturity period of
more than one year in end-Apr 22. In the final week of April (25 Apr 22 – 1 May 22), the
China weighted average interest rate on new deposits in financial institutions was 2.37%,
down 10bp from the previous week.
• The reduction of deposit interest rates will not affect demand deposits, only time deposits.
We expect a 30% reprice of fixed deposits. According to our analyses, the sector’s: a)
NIM, b) interest income, c) net interest income, d) total revenue, and e) pre-tax profit will
increase by 1.21bp, 0.58%, 0.43%, and 1.07%, respectively. Generally, banks with higher
time deposit to total liability ratio will benefit more.
• China cuts rate floors on mortgages for first-time homebuyers. China’s central bank
and banking and insurance regulator on 15 May 22 moved to lower interest rate floors on
mortgages for first-time homebuyers by 20bp off the benchmark LPR. We opine this will:
a) help to lead local governments and banking institutions to further modify their credit
policies, especially in terms of mortgage interest rates, b) aid real estate firms to actively
promote and sell property, especially in combination with the recent advantages of low
mortgage interest rates, encouraging real estate companies to fully drive the activity of
real estate transactions, and c) further lower the cost of property buyers together with the
recent easing of policies in many regions, as it can further relieve the pressure of property
purchasers. This would generate improved conditions for active market transactions in
mid-to-late May 22.
ESSENTIALS
• Weak trade figures may result in a lower GDP, thus actions may be taken to bolster
the economy. As Shanghai’s lockdowns tightened in Apr 22, China’s export and import
growth slowed significantly. Export slowed to 3.9% yoy (Bloomberg: 2.7% yoy, Mar:
14.7% yoy), the worst rate since Jul 20. For the second consecutive month, imports were
unchanged at 0.0% yoy (Bloomberg: -3.0% yoy, Mar: -0.1% yoy). China’s trade surplus
increased to US$51.12b in Apr 22 from US$47.38b in Mar 22. The outlook for China’s
economic growth has continued to deteriorate as a result of the prolonged COVID-19
epidemic in Shanghai and other cities adopting a more severe containment strategy to
prevent a potential rise in infections. Due to the disruptions on industry productions and
logistics bottlenecks, trade activities will continue to be impacted at least until May 22.
Import demand will also be badly affected by the lockdowns and high commodity prices
arising from the Russia-Ukraine conflict. Thus, there is a growing downside risk to China’s
growth outlook.
• Hence we expect the PBOC to increase its monetary policy easing; the one-year MLF
rate is likely to be reduced this month to stimulate credit demand, following a 25bp
reduction in banks’ reserve requirement ratio (RRR) on 25 April.
• Previous RRR cut impact was not significant. Effective from 25 Apr 22, China’s central
bank has cut the RRR for all banks by 25bp, small commercial banks and selected rural
lenders will benefit from a further reduction of 25bp, releasing about Rmb530b in long-term liquidity and the weighted average RRR for financial institutions will be lowered to
8.1% after the cut. Although this will help nudge down bank lending rate, the reserve cut
alone will have little impact to boost growth. To support credit growth, it needs to be
followed up by cuts to policy rates and a relaxation of loan quotas. As the headwind
builds, the government’s 5.5% GDP growth target in 2022 may now be hard to achieve
without more aggressive stimulus measures. To achieve the 5.5% growth target, we
anticipate additional interest rate reduction in the near future.
• Expect another 10-15bp LPR reduction in 1H22. Given China’s sluggish economy, we
anticipate the PBOC strengthening its monetary policy easing. Therefore, MLF will likely
be cut this month. Historically, the PBOC has bolstered the economy by injecting liquidity
into the banking sector through open market operations. The one-year LPR decreased by
30bp in 2020 (the worst year of COVID-19) from 4.15% to 3.85%. Since Nov 21, the LPR
has declined by 15bp. If it decreases by a further 10bp in May 22, it would have dropped
by a total of 25bp in six months, which is close to the decline in 2020. Thus, following the
probable MLF reduction, this could indicate a 10-15bp LPR decline in 1H22.
• The reduction of deposit interest rates will only affect time deposits; hence we expect a
30% reprice of fixed deposits. As for loan, we assume 40% reprice of loans this year, if
LPR is reduced by 10bp. According to our analyses, the sector’s: a) NIM, b) interest
income, c) net interest income, d) total revenue, and e) pre-tax profit will decline by
1.34bp, 0.65%, 0.470%, and 1.180%, respectively (refer to the table below). a) Postal
Savings Bank of China, b) Bank of Guiyang, and c) Chongqing Rural Commercial Bank
outperformed the other 42 banks.
• The decline in real economy financing costs will produce substantial benefits for corporate
operations and bank asset quality. Consequently, this will reduce the credit cost of the
banking industry and maintain a stable profit growth rate.
ACTION
• We maintain MARKET WEIGHT on the sector given the weak economy in China.
The slowing economy is lowering loan demand, and the primary concern is asset quality.
Although significant NIM compression is not a primary worry for the banking sector, banks
have guided for NIM will remain compressed in 2022. Hence, we do not see any re-rating
catalysts for the sector in the near term.
• China Construction Bank (939 HK/BUY/Target: HK$8.05). We think CCB’s valuation
and dividend yield will be attractive to long-term investors. Its low valuation and aboveaverage asset quality are good defensive plays. Maintain BUY with a target price of
HK$8.05, which is based on the Gordon Growth Model and which implies 0.58x 2022F
P/B and a dividend yield of 8.3%.
• China Merchants Bank (3968 HK/BUY/Target: HK$82.90). CMB is one of the best
quality banks in China for its asset quality, strong private banking business and high
reserve buffer. Maintain BUY. Based on the Gordon Growth Model, we derive our target
price of HK$82.90, which implies 1.90x 2022F P/B.
